A Look at Three Large Companies that are Moving on Earnings

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Earnings and earning-related news is the number one catalyst for stock movement. A strong quarter can dictate the direction of a stock for the following three months as can a bad quarter; in the past I have written in detail about such subjects, a domino effect following a strong or bad quarter. In this piece I am looking at the early performance of three large companies following earnings. Then I am trying to determine whether or not the moves are warranted and if future gains are present.

Hedge Fund Favorite Gets Stock Boost

International insurance company American International Group (NYSE: AIG) was trading higher in the premarket session by more than 3.5% after reporting earnings. The company beat the consensus and showed strong growth across the board. AIG posted a significant gain in Life and Retirement income along with strong P&C fundamentals despite impact from hurricane Sandy.

Last Thursday news was released that AIG is now the favorite holding of hedge funds. Yet despite this fact the stock still trades considerably lower than its book value per share, which increased 15% year-over-year (yoy) to $57.87. This is a company that continues to grow while remaining cheap, and despite its 3.5% gain I would still buy this stock.

A Potential Turnaround Pushes this Stock Higher

Hewlett-Packard (NYSE: HPQ) was trading higher by more than 5% after the company beat on both the top and bottom line by a wide margin for Q1. The company’s bullish guidance remained unchanged, as sales in many of its segments remained steady. There were many who expected the announcement of a break-up, yet the company’s CEO insisted that the company will not be broken up.

Hewlett-Packard is a large diversified and complicated business that has lost more than 40% of its value in the last year alone. Therefore, with such a large loss in value, I find its 6% loss in yoy sales quite encouraging, and believe that this is one of the cheaper stocks in the market, if in fact sales are finding a level of consistency. At current levels, I’d take a long hard look at shares of HP.

Shares Fall While Earnings Look Strong

Shares of luxury retailer Nordstrom (NYSE: JWN) traded lower by 1% after reporting earnings that met expectations. The company showed 13.5% top line growth (in-line) and posted an EPS of $1.40, therefore beating the consensus by $0.06. The company saw a 6.3% increase in same-store sales and 20% growth to net earnings, which represents an improvement in margins.

Nordstrom looks to have posted a very strong quarter with growth that far exceeds the industry average. The company did issue lower guidance than analysts expected, yet this revised outlook was still better than the majority of retailers. This is a stock trading with a price/sales under 1.0 and a forward P/E ratio of 12.00, therefore if the stock trades lower I’d use it as an opportunity.

Conclusion

In my bookTaking Charge With Value Investing (McGraw-Hill), I examine human behavior and the psychological effects that take place in the minds of investors when a stock shoots higher or falls drastically lower (think roulette at a casino). For many investors, chasing these trends is common, even addicting, and very few are capable of realizing their losses because of their occasional gain. Investors need to avoid this behavior after earnings, and look not at the performance of the stock but rather the significance of the news. By doing so, you will be able to find the inconsistencies and a distinction between performance and fundamentals, which creates value and allows for large returns. 


BrianNichols has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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